3.1 Overview

Inflationary pressures dampened considerably during FY02 despite the aftermath of events of   September 11 and continuation of a drought-like situation in the country. Better availability of  essential commodities, due to improved production of both food and non-food items as well as the  food stocks for prior periods, had a moderating influence on inflation. A noteworthy aspect of  domestic goods market was the absence of hoarding and speculation that could otherwise have easily  flared up the tempo of prices during US-led war against terrorism in Afghanistan and border tensions  with India. Another important feature underlying the inflation that could also have reversed its  deceleration was a relatively higher increase in money supply in FY02 compared with the previous  year. However, a noticeable deceleration in the net domestic assets of SBP helped absorbing a  significant increase in its net foreign assets that enabled the reserve money to expand at a much lower  pace than that of money supply, thereby supporting the deceleration in inflation. Appreciation ofPak  Rupee by 6.7 percent during FY02 also helped control the imported component of inflation. 

Annual average rates of inflation in terms of all three price indices as well as the GDP deflator went down during FY02 from their levels last year.' The rate of inflation in terms of the Consumer Price Index (CPI) came down to 3.5 percent in FY02 from 4.4 percent last year. The deceleration was markedly visible in the Wholesale Price Index (WPI); from 6.2 percent mFYOl to 2.1 percent in FY02 (see Table 3.1).  Deceleration in the Sensitive Price Indicator (SPI) was less pronounced than WPI but more than the CPI. In terms of the annual marginal rates of inflation, deceleration was amply visible in the WPI (down to 2.4 percent in FY02 from 4.5 percent in FY01).2 However, the CPI and SPI registered acceleration. Nevertheless, the inflation outlook for the future remains subdued as visible in Figure 3.1, which indicates a continuing downward trend for the WPI that is likely to contain the pressure on retail prices. In fact, the annual marginal rates of inflation were negative for the WPI during November 2001 to February 2002.

Table 3.1: Inflation Trends

percent

Annual Average

Annual Marginal

GDP

deflator

July to June basis

June To July Basis

CPI

WPI

SPI

CPI

WPI

SPI

FY98

7.7

7.8

6.6

7.4

6.5

5.3

5.7

FY99

5.9

5.7

6.4

6.4

3.7

4.6

4.1

FY00

2.8

3.6

1.8

1.8

5.1

3.4

3.3

FY01

5.6

4.4

6.2

4.8

2.5

4.5

2

FY02'1

4.6

3.5

2.1

3.4

4.4

2.4

4.4

p: Provisional

Despite visible deceleration in inflation recorded by various indices, general perceptions about   inflation remained skeptical and dismissive of the official figures that are compiled by the Federal   Bureau of Statistics (FBS). Box 3.1 provides important insights about the origin of these negative  perceptions. The fact remains that the official inflation numbers are based on a systematic method of  survey sampling, which minimizes a lot of biases that creep in selective efforts of individuals to compile prices and compute inflation. Price data compiled by the FBS is one of the most reliable  among various data sets in Pakistan. The negative perceptions can be addressed by dissemination of  compilation methods and full disclosure of price data along with the results of the Family Budget  Survey.3

3.2 Supply Side Factors 

A slowdown in the rate of inflation during FY02 has been made possible mainly on account of the  considerable improvement in domestic availability and the utilization of piled up stocks of essential  items like wheat, sugar, cotton etc. The overall food situation recorded a significant improvement during FY02. The realization of sizeable cotton, wheat and sugarcane crops along with better  livestock production largely contributed in improving the supply side. A significant improvement  was also recorded in the quantum index of gram, rapeseed & mustard and other minor crops during  the period under review. The continued import of raw and refined sugar in early months of the year  and accumulating stocks combined with better production during the season were the other factors for  keeping commodity prices in lower band. Moreover, the utilization of idle capacity in some of the  sectors like cement etc. further eased the supply scenario. 

3.3 Imported Commodities 

The decline in some of the oil and non-oil commodity prices was another contributory  factor in moderating domestic inflation during recent years. Given the fact that the economy  has a considerable degree of openness to foreign trade, changes in world prices especially of strategic import items, can have significant pass through effects on domestic inflation. Table 3.2 shows selected commodities of importance in Pakistan's trade  basket along with the changes in their international prices during FY02. This  importance becomes clear from the fact that during the FY02, Pakistan imported edible oil  of US$ 393.0 million, tea ofUS$ 156.6 million and crude oil ofUS$ 1, 230.8 million.

The second half of FY02, especially near the end months recorded a sharp increase in the  prices of palm oil in international market. Consequent to the increase in international  palm oil prices, domestic prices of ghee and cooking oil witnessed an increase in the second half of the FY02. The average price of palm oil in the international market was higher by 59.9 percent in June 2002 over the rresponding  period last year. The surge was due to the low  stocks, falling production and higher demand (see Figure 3.2). Malaysian market remained  higher mainly on account of the poor stock, low production and heavy purchases by India, China  and certain other countries. However, the surge in demand begin to die down as the stock in  Malaysian market is likely to increase as a result of rising output which would have a  depressing effect on future prices.

 World petroleum prices recorded a considerable decline in early FY02. There was a considerable fall  in world oil demand since September 11, mainly due to low demand and reduced economic growth  coupled with excess oil supply that surpassed the last five-year average. However, petroleum prices  rebounded in January 2002, largely in reaction of the OPEC's4 decision to cut crude oil production by  1.5 million barrels on daily basis, conflicting statements from producers on supply increase in future,  increasing world economic demand for oil, concerns related to potential oil supply disruptions in the  Middle East and labor unrest in Venezuela along with weak inventories of crude petroleum products  (see Figure 3.3).5 The recent evidence suggests that international demand for oil has increased over  supply, which might escalate energy prices in future (see Figure 3.4).

Table 3.2: Selected Global Commodity Prices

Absolute

% Change in

Unit

prices/Index

FY02 over

June 02

FY01

Sugar (world)

cent/Kg

12.68

-36.4

Crude oil-Brent

$/bbl

24.49

-11.65

Cotton, " A" index

cent/Kg

95.4

-8.9

Aluminum

$/mt

1354

-7.6

Tea (avg. 3 auctions)

cent/Kg

154.5

-4.7

Iron ore

cent/dmtu

29.31

-3.3

Steel products index

—

66.5

0.8

Copper

$/mt

1648

2.5

Fertilizer-index

—

99

3.1

Wheat US

$/mt

132

4.5

Tin

cent/Kg

428.6

12.6

Rice Thai 5 %

$/mt

202.7

20.8

Rubber (Malaysia)

cent/Kg

84.5

31.8

Soya bean oil

$/mt

438

38.6

Palm oil

$/mt